Vietnam's state-owned oil company, PetroVietnam, and its Venezuelan counterpart, Petroleos de Venezuela (PDVSA), announced big new plans in August for joint upstream and downstream oil projects. In one multi-million dollar deal, PDVSA plans to export crude oil and invest in the establishment of a Vietnam-based refinery to take and process the fuel.

Venezuelan energy and oil minister Rafael Ramirez said the deal would entail the creation of two joint companies, one to transport Venezuelan crude oil to Vietnam and the other to jointly refine the fuel. Reciprocally, PetroVietnam said it aims to expand its existing upstream exploration activities, now in the development phase, in Venezuela's Orinoco basin in partnership with PDVSA.

The upstream contracts are expected to be formally signed later this month when Chavez makes his second official visit to Vietnam. The negotiations were hammered out in Caracas in August when a delegation of Vietnamese officials led by Industry and Commerce Minister Vuy Huy Hoang met with Chavez and his Venezuelan government counterparts.

The deals are expected to help shore up Vietnam's shaky energy security while diversifying a bigger share of Venezuela's oil exports away from the West and towards Asia.

Chavez, who has cut a strong profile in Latin America with his left-leaning economic nationalism and diplomatic antagonism towards the US, has stated his ambition to build strong, trade-linked ties with Vietnam's communist regime.

His visit later this month will follow up an initial energy cooperation agreement he signed in July 2006 in Hanoi. At that time, Chavez was reported saying that he hoped to draw Vietnam into his alliance against "US imperialism". This came just a few weeks before Chavez's eyebrow-raising remark at the United Nations when he said he could still smell sulfur on the podium after an earlier presentation made by US President George W Bush.

Chavez has used generous oil deals and revenues earned through PDVSA to forward his anti-US political agenda in Latin America. His overtures towards Vietnam represent Chavez's first big foray into Asia. His campaign has aimed at building closer ties with similarly left-leaning governments, such as Cuba and Bolivia, and other countries that are not closely allied with the US or Western Europe.

With its rapid economic growth and rising diplomatic profile, including one of the revolving seats on the United Nations' Security Council, communist-run Vietnam is a natural beachhead for Chavez to pursue his Asian agenda. Venezuela's oil-driven gambit will also help fill the void left by Hanoi's long time patron Russia, which throughout the 1980s and 1990s was a key player in the country's energy sector.

It's unclear if Venezuela's move into Vietnam is in anyway linked to recent Russian-Venezuelan military cooperation aimed at counterbalancing the US. Two Russian fighters trained for the first time in Venezuela on Wednesday and Chavez has said the two sides will conduct joint naval exercises in November, which will include a nuclear-powered guided missile cruiser, according to news reports.

Oil and politics Vietnam's Venezuelan embrace coincides with its warming bilateral relations with the US. Vietnam relied heavily on US support for its bid to join the World Trade Organization last year and Vietnam's pragmatic leadership under prime minister Nguyen Tan Dung has shown no signs of joining Chavez's anti-US campaign.

That's because trade and investment, rather than ideology and war grievances, now guide Vietnam's diplomacy. The US is now one of Vietnam's most important trade partners, with two-way trade reaching US$12 billion in 2007. US oil giants ConocoPhillips and Chevron have operations in Vietnam, while Exxonmobil is looking towards new upstream investments. US companies have also made major investments in export-driven manufacturing facilities in Vietnam.

At the same time, Hanoi is open to building commercial ties with any country where economic benefits can be accrued, particularly in the energy sector. In the case of Venezuela, the budding bilateral relationship could help fill Vietnam's emerging energy gap as more pressure is put on Vietnam's oil supply as a result of increased domestic demand and flattening local production.

Venezuela is Latin America's largest and among the world's 10 biggest oil producers, with an output of 2.6 million barrels per day in 2007, according to the BP Statistical Review of World Energy. More than 80% of that crude output is exported, much of it to the US, although Caracas now aims to diversify more of its exports to Asia with China an important target market.

PetroVietnam's foray into Venezuela follows several other Asian national oil companies which, under Chavez's encouragement, have recently forged investment ties with PDVSA. Russia's Gazprom, Iran's Petrobras, China National Petroleum Corp and India's Oil and Natural Gas Corp all now have Venezuela-based operations. While those state-led firms move in, Chavez has made tax conditions for big private Western oil firms more onerous.

Vietnam is also a major, but declining, oil producer, ranking as the third largest in Southeast Asia after Indonesia and Malaysia. The country exports virtually all of its crude because the country lacks domestic refining capacity. A 130,000 barrels per day refinery is scheduled to come on stream at Dung Quat on the country's central coast next year. Plans for other refineries situated in the country's northern and southern regions are set to follow.

The government is keen to attract foreign investment for these planned refineries and Hanoi has courted Venezuela's technical know-how and rich store of petrodollars. Vietnam's own crude production levels are faltering, with output falling from a high of 427,000 barrels per day in 2004 to 340,000 barrels per day last year. As of July this year, production was down to 290,000 barrels a day.

While new fields set to come on-stream later this year will boost production, Hanoi still needs desperately to diversify its import options. PetroVietnam's upstream foray into Venezuela is clearly in response to this state-led strategy. Following in the footsteps of Malaysia's state-owned Petronas - which has successfully transformed itself from a domestic to a multinational energy company, PetroVietnam is now bidding to build its own overseas portfolio.

The state-controlled oil company now has positions in Algeria, Madagascar, Cuba, Peru, Mongolia, Central Asia, Malaysia and Indonesia. In the Middle East, it is seeking a new upstream stake in Iraq and is among a group of companies qualifying for Iraqi petroleum contracts. PetroVietnam had taken a 100% stake in Iraq's Amara oil field, but operations were suspended after the 2003 invasion.

The planned ventures between PetroVietnam and PDVSA underscore the growing global trend of big national oil companies joining forces. No longer is the global petroleum industry driven only by major Western oil corporations, such as ExxonMobil, Chevron, BP, and Shell, who before mergers dominated the industry as the "seven sisters". Now national oil companies are increasingly dynamic players, both in their own countries and internationally. Meanwhile Chavez's oil-driven, anti-US agenda has made its first inroads into Asia.

By Andrew Symon - Asia Times - September 12, 2008